On August 21, 2009, the Federal Energy Regulatory Commission ("FERC") approved a nonconforming Large Generator Interconnection Agreement ("LGIA") between Pacific Gas and Electric Company ("PG&E") and the California Independent System Operator Corporation ("CAISO") that relieved PG&E of the obligation to advance funds and provide construction security for the interconnection of a utility-owned generator on the terms set forth in the pro forma LGIA.1

Acceptance of the agreement resolves a dispute between PG&E and the CAISO concerning the interconnection of PG&E's 166 MW Humboldt Bay Re-Powering Project with PG&E's existing 60 kV and 115 kV transmission facilities. PG&E filed the nonconforming pro forma LGIA with FERC, proposing to label as "not applicable" certain provisions of the CAISO's proposed LGIA appendices which call for "the payment of advance funds by the Interconnection Customer to the Transmission Owner for construction, and the refund of these monies, including interest, by the Transmission Owner to the Interconnection Customer for network transmission facilities, as well as the requirement for the Interconnection Customer to provide a form of security for construction costs."2 PG&E argued that it would essentially be making a loan to itself for the network upgrades and then repaying the loan to itself with interest. Furthermore, having PG&E advance itself the costs of construction would eliminate the normal accrual of Allowance for Funds Used During Construction and leave PG&E with only the lower FERC interest rate for the recovery of its financing costs for the network upgrades.

While FERC noted the importance of using pro forma documents to ensure that Interconnection Customers are treated on a just and reasonable and not unduly discriminatory basis, it also acknowledged that there would be a small number of extraordinary interconnections that would call for nonconforming agreements. FERC found the fact that PG&E is both the Transmission Owner and the Interconnection Customer to be a unique enough circumstance to allow for a nonconforming agreement without it resulting in undue discrimination. Since "[t]he funding and security provisions at issue exist to protect the Transmission Owner from financial risk associated with the construction of interconnection facilities or upgrades requested by an independent Interconnection Customer," FERC reasoned, "where the Transmission Owner and the Interconnection Customer are one and the same, that protection is unnecessary."3

FERC specifically noted that PG&E did not request that an affiliate be relieved from posting security,4 and FERC's logic would preclude extension of this holding to situations where the Transmission Owner and the Interconnection Customer are affiliates, rather than the same entity.

A particularly interesting aspect of this case is whether the same set of facts arising absent the dispute about the appendices between PG&E and the CAISO would necessitate the filing of a nonconforming agreement. The provisions which PG&E sought to alter are contained in the appendices of its agreement, which are more detailed than required by FERC's pro forma LGIA. However, the CAISO argued that acceptance of the nonconforming appendices required waiver of Section 11.5 of the LGIA, which requires security to be posted prior to construction. FERC granted the waiver, because it agreed with the CAISO that Section 11.5 of the LGIA did not contemplate a situation where the Transmission Owner and Interconnection Customer would be the same entity. However, FERC also took note of Section 11.3, which provides that "[u]nless" the Transmission Owner "elects" to fund the construction costs itself, the Interconnection Customer is responsible for the costs.5 FERC interpreted Section 11.3 as providing an affirmative right of election: "[A]rticle 11.3 of the pro forma LGIA does in fact provide that the Transmission Owner may elect to fund that capital for network upgrades itself."6 Coupled with FERC's determination that no undue discrimination would result from "the failure by the Interconnection Customer to provide security or funding...inasmuch as the Customer and the Transmission Provider are the same entity,"7 it is arguable whether a waiver of Section 11.5 is required. In other words, the Transmission Provider always has the right under Section 11.3 to waive the funding requirement of Section 11.5, and if it elects to apply the waiver only when the customer is itself, then it is not acting in an unduly discriminatory manner. However, FERC's decision to grant a waiver of Section 11.5 instead suggests that if a utility wishes to self-fund and dispense with the intercompany security, as suggested by Section 11.3, a waiver request or an amendment to Section 11.5 would be the more appropriate way to proceed, and the application would be well received by FERC.

The decision is subject to rehearing; requests for rehearing are due on September 21. In addition to PG&E and CAISO, Duke Energy Corporation and San Diego Gas & Electric Company are parties to the case.